Conditions for securitization of PPP project assets

Asset securitization, an important financing instrument, has seen rapid growth in the Chinese market in recent years. As the investment in public-private partnership (PPP) projects is large, their terms of operation long, and their cashflows usually relatively stable and predictable, organically combining PPP projects and asset securitization is conducive to driving the development of the real economy, expanding financing channels, reducing financing costs and revitalizing existing assets.

State policy encourages the securitization of PPP project assets. The Opinions of the State Council on Strengthening the Administration of Local Government Debt in 2014 signalled the push to use the PPP model. Investors or special purpose vehicles could seek debt financing through such market means as bank loans, corporate bonds, project revenue bonds, asset securitization, etc., and assume the liability for debt repayment. In June 2017, the Ministry of Finance, the People’s Bank of China and the China Securities Regulatory Commission jointly issued the Notice on Matters Relevant to the Compliant Carrying Out of Asset Securitization for Public-Private Partnership Projects (document No. 55). Pursuant to this, a PPP project proposing to carry out asset securitization is required to satisfy the following conditions.

A PPP project is required to comply with relevant procedural and substantive provisions

First, procedurally, the approval procedure needs to be carried out strictly in accordance with regulations, the implementation plan needs to be objective and reasonable, the project needs to have passed a value-for-money assessment and fiscal affordability demonstration, and have been entered into the Ministry of Finance’s comprehensive information platform PPP project database and the NDRC’s PPP project database, and its procurement procedure needs to be lawful and compliant.

Second, substantively, the PPP project contract system needs to be sound, the risks reasonably allocated and co-operation among the public party, the private party and project participants smooth. Third, construction quality of the project is required to satisfy relevant standards, the project should be able to operate in an ongoing, safe and stable manner, and the performance capacity of the project should be relatively strong.

Author: Wang Jihong is a partner and Liu Ying is an associate at Zhong Lun Law Firm in Beijing